Tracing the trail

18th January 2011

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It is estimated that foreign ownership of UK companies has increased fourfold in the last 20 years. In 2008, it was revealed that 41.5 per cent of the UK stock market was in the hands of foreign investors.

Transparency

Although this influx of capital was hailed as being a great thing for British businesses, there is an issue around transparency. Under the Companies Act 2006, companies are able to locate the ultimate, or beneficial, holders through Section 793. Should intermediaries refuse, companies can appeal to the courts to remove the shareholder’s entitlements.

In line with the EU’s 2007 Shareholders’ Rights Directive (SRD), the UK’s treatment of proxy appointees (those intermediaries who hold the share for the beneficial shareholder) as identified through the Companies Act, is almost as if the appointee is the actual shareholder. As far as the law is concerned, they are the same – the worthwhile differences under the law are relatively small.

Using that example as our benchmark, we can look at how local offshore jurisdictions treat shareholders. For  example, the neighbouring Channel Island (CI) states of Jersey and Guernsey allow for differing paths for domestically incorporated companies.

Both states have their own companies law, which is in most respects non-prescriptive. Members’ affairs are generally ‘regulated’ in accordance with the companies’ articles of association. This means that powers conferred on UK companies, together with shareholders’ rights, under the UK’s Companies Act can be replicated, if required, within companies’ articles. Sanctions for non-compliance can also be included.

The fact that there is no recourse to enforcing legislation that hinders companies’ attempts to obtain beneficial ownership information in these jurisdictions. It is an interesting conundrum – for the shareholder data does exist, but companies cannot be compelled to provide it. In Jersey, for example, there is a legal requirement to advise the Registrar of Companies of beneficial ownership details when setting up a company and to inform any subsequent changes. However, there remains no general right of public disclosure or access to company registers.

With both islands not being part of the EU, they are not subject to the provisions of legislation such as the SRD. It is interesting to note that Jersey legislation makes no accommodation towards proxy voting rights but, in contrast, Guernsey’s statute allows for proxy appointees to attend meetings and vote on a show of hands only. However, many CI-based companies are amending their articles in line with the ideas in the SRD (including proxy-voting rights), and it is becoming best practice to include some of these in the articles of newly-formed companies.

Like Jersey and Guernsey, the Isle of Man (IoM) is neither a member state nor an associate member of the EU. For IoM companies, criteria relating to beneficial owner investigation and shareholders’ proxy voting rights are similarly controlled through companies’ articles. It is pleasing to note that many IoM companies have begun the process of amending their articles to impose similar voting rights to those under SRD.

International

Referring to offshore territories a bit further afield – in the British Virgin Islands, elements of member confidentiality are again to the fore. Shareholders generally have proxy voting rights, but with no requirements for BVI companies to hold annual general meetings, how often would they get to practise these rights? As in other offshore locations, there

is no regulation to compel disclosure of shareholder data. Any regulation that does relate to the disclosure of beneficial owner information is only relevant as a due diligencetype exercise. Any information is maintained by the local registered agent, who cannot be compelled to release this data.

The situation is again slightly different in the Cayman Islands. Those companies applying to register under the Cayman Islands’ company law, but who wish to carry on their business outside the Islands may apply to the Registrar of Companies to be registered as an exempted company. Regardless of the type of issue exempted companies make, there is no requirement for a register to be maintained, so data on ultimate shareholders is not even present, never mind discoverable. With regard to proxy voting rights, as with the Channel Islands, these can again be detailed in the articles of the company, but are otherwise not enforced by legislative means.

As most offshore jurisdictions offer greater tax efficiencies for companies, the parallel need for non-disclosure of shareholders and beneficial owners must help reinforce these efficiencies. Thus, the most interesting future developments may be those based at the EU level regarding the responsibilities of those within the shareholding chain of intermediaries.

For example, many offshore companies appear to be acceding to the rights of shareholders as recommended by the SRD, although in a voluntary non-regulated manner, but this has taken some time to effect. Where will the pressure on offshore jurisdictions to keep up with new EU regulations come from? It may well be down to the global community for any real progress to be made on this front.

About the author

Máté Krantz is Head of Business Development at Capita Investor Relations Services

This article was first published on the January 2011 edition of ICSA Focus magazine.

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